ATLO 10-Q Quarterly Report Sept. 30, 2021

AMES NATIONAL CORP

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atlo20210930_10q.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[Mark One]
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from ____________ to ____________

Commission File Number 0-32637

AMES NATIONAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Iowa	42-1039071
(State of Incorporation)	(I. R. S. Employer
	Identification Number)

405 Fifth Street

Ames , Iowa 50010

(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: ( 515 ) 232-6251

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock	ATLO	NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 29, 2021, there were 9,092,167 shares of common stock, par value $2, outstanding.

Table of Contents

AMES NATIONAL CORPORATION

INDEX

		Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets at September 30, 2021 and December 31, 2020	3

	Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020	4

	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020	5

	Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020	6

	Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4.	Controls and Procedures	53

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	53

Item 1.A.	Risk Factors	53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 3.	Defaults Upon Senior Securities	54

Item 4.	Mine Safety Disclosures	54

Item 5.	Other Information	54

Item 6.	Exhibits	55

	Signatures	56

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

	September 30,		December 31,
	2021		2020
	(unaudited)		(audited)
ASSETS
Cash and due from banks	$	25,607	$	24,819
Interest-bearing deposits in financial institutions and federal funds sold		122,786		166,704
Securities available-for-sale		765,423		596,999
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock, at cost		3,424		3,148
Loans receivable, net		1,126,059		1,129,505
Loans held for sale		378		1,621
Bank premises and equipment, net		16,929		17,340
Accrued income receivable		11,178		11,143
Bank-owned life insurance		2,968		2,916
Deferred income taxes, net		725		-
Intangible assets, net		2,654		3,133
Goodwill		12,424		12,424
Other assets		5,841		5,896

Total assets	$	2,096,396	$	1,975,648

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits
Noninterest-bearing checking	$	373,883	$	349,500
Interest-bearing checking		585,056		528,796
Savings and money market		654,345		581,224
Time, $250 and over		44,641		60,019
Other time		178,783		196,907
Total deposits		1,836,708		1,716,446

Securities sold under agreements to repurchase		36,277		37,293
FHLB advances		3,000		3,000
Dividends payable		2,366		-
Deferred income taxes, net		-		1,731
Accrued expenses and other liabilities		7,665		7,691
Total liabilities		1,886,016		1,766,161

STOCKHOLDERS' EQUITY
Common stock, $ 2 par value, authorized 18,000,000 shares; issued and outstanding 9,098,144 and 9,122,747 as of September 30, 2021 and December 31, 2020, respectively		18,196		18,245
Additional paid-in capital		16,480		17,002
Retained earnings		167,443		158,217
Accumulated other comprehensive income		8,261		16,023
Total stockholders' equity		210,380		209,487

Total liabilities and stockholders' equity	$	2,096,396	$	1,975,648

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

(in thousands, except per share data)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2021			2020		2021			2020

Interest and dividend income:
Loans, including fees	$	12,530		$	12,865	$	36,641		$	38,022
Securities:
Taxable		2,256			1,986		6,457			5,725
Tax-exempt		725			892		2,392			2,756
Other interest and dividend income		168			175		515			888
Total interest income		15,679			15,918		46,005			47,391

Interest expense:
Deposits		993			1,719		3,411			6,267
Other borrowed funds		34			39		106			238
Total interest expense		1,027			1,758		3,517			6,505

Net interest income		14,652			14,160		42,488			40,886

Provision (credit) for loan losses		( 94	)		541		( 540	)		4,424

Net interest income after provision (credit) for loan losses		14,746			13,619		43,028			36,462

Noninterest income:
Wealth management income		1,147			1,037		3,224			2,808
Service fees		385			381		1,065			1,127
Securities gains, net		24			-		24			430
Gain on sale of loans held for sale		429			647		1,313			1,486
Merchant and card fees		488			460		1,508			1,296
Other noninterest income		200			271		681			708
Total noninterest income		2,673			2,796		7,815			7,855

Noninterest expense:
Salaries and employee benefits		5,487			5,840		16,766			17,428
Data processing		1,307			1,210		3,989			3,737
Occupancy expenses, net		632			668		1,999			2,016
FDIC insurance assessments		154			136		441			186
Professional fees		396			408		1,307			1,149
Business development		344			307		835			753
Intangible asset amortization		159			216		479			650
New market tax credit projects amortization		160			145		479			436
Other operating expenses, net		258			362		1,022			1,086
Total noninterest expense		8,897			9,292		27,317			27,441

Income before income taxes		8,522			7,123		23,526			16,876

Provision for income taxes		1,808			1,451		4,910			3,222

Net income	$	6,714		$	5,672	$	18,616		$	13,654

Basic and diluted earnings per share	$	0.74		$	0.62	$	2.04		$	1.49

Dividends declared per share	$	0.52		$	0.25	$	1.03		$	0.50

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020


Net income	$	6,714		$	5,672		$	18,616		$	13,654
Unrealized gains (losses) on securities before tax:
Unrealized holding gains (losses) arising during the period		( 1,507	)		1,995			( 10,325	)		15,595
Less: reclassification adjustment for gains realized in net income		24			-			24			430
Other comprehensive income (loss), before tax		( 1,531	)		1,995			( 10,349	)		15,165
Tax effect related to other comprehensive income (loss)		383			( 499	)		2,587			( 3,791	)
Other comprehensive income (loss), net of tax		( 1,148	)		1,496			( 7,762	)		11,374
Comprehensive income	$	5,566		$	7,168		$	10,854		$	25,028

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS ’ EQUITY (unaudited)

(in thousands, except share and per share data)

Three and Nine Months Ended September 30, 2021 and 2020

	Common Stock						Additional Paid-in			Retained			Accumulated Other Comprehensive Income, Net of			Total Stockholders'
	Shares			Amount			Capital			Earnings			Taxes			Equity

Balance, June 30, 2020		9,122,747		$	18,245		$	17,002		$	151,910		$	13,993		$	201,150
Net income		-			-			-			5,672			-			5,672
Other comprehensive income		-			-			-			-			1,496			1,496
Cash dividends declared, $0.25 per share		-			-			-			( 2,281	)		-			( 2,281	)
Balance, September 30, 2020		9,122,747		$	18,245		$	17,002		$	155,301		$	15,489		$	206,037


Balance, June 30, 2021		9,122,747		$	18,245		$	17,002		$	165,466		$	9,409		$	210,122
Net income		-			-			-			6,714			-			6,714
Other comprehensive (loss)		-			-			-			-			( 1,148	)		( 1,148	)
Repurchase and retirement of stock		( 24,603	)		( 49	)		( 522	)		-			-			( 571	)
Cash dividends declared, $0.52 per share		-			-			-			( 4,737	)		-			( 4,737	)
Balance, September 30, 2021		9,098,144		$	18,196		$	16,480		$	167,443		$	8,261		$	210,380

	Common Stock						Additional Paid-in			Retained			Accumulated Other Comprehensive Income (Loss),			Total Stockholders'
	Shares			Amount			Capital			Earnings			Net of Taxes			Equity

Balance, December 31, 2019		9,222,747		$	18,445		$	18,794		$	146,225		$	4,115		$	187,579
Net income		-			-			-			13,654			-			13,654
Other comprehensive income		-			-			-			-			11,374			11,374
Repurchase and retirement of stock		( 100,000	)		( 200	)		( 1,792	)		-			-			( 1,992	)
Cash dividends declared, $0.50 per share		-			-			-			( 4,578	)		-			( 4,578	)
Balance, September 30, 2020		9,122,747		$	18,245		$	17,002		$	155,301		$	15,489		$	206,037


Balance, December 31, 2020		9,122,747		$	18,245		$	17,002		$	158,217		$	16,023		$	209,487
Net income		-			-			-			18,616			-			18,616
Other comprehensive (loss)		-			-			-			-			( 7,762	)		( 7,762	)
Repurchase and retirement of stock		( 24,603	)		( 49	)		( 522	)		-			-			( 571	)
Cash dividends declared, $1.03 per share		-			-			-			( 9,390	)		-			( 9,390	)
Balance, September 30, 2021		9,098,144		$	18,196		$	16,480		$	167,443		$	8,261		$	210,380

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

Nine Months Ended September 30, 2021 and 2020

	2021			2020

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	18,616		$	13,654
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		( 540	)		4,424
Provision (credit) for off-balance sheet commitments		( 2	)		51
Amortization of securities, available-for-sale, loans and deposits, net		1,909			559
Amortization of intangible assets		479			650
Depreciation		1,032			1,084
Deferred income taxes		131			( 942	)
Securities (gains), net		( 24	)		( 430	)
(Gain) on sales of loans held for sale		( 1,313	)		( 1,486	)
Proceeds from loans held for sale		55,004			67,935
Originations of loans held for sale		( 52,448	)		( 66,469	)
Loss on sale and disposal of premises and equipment, net		13			59
Amortization of investment in New Markets Tax Credit projects		479			436
Impairment of other real estate owned		83			-
(Gain) loss on sale of other real estate owned, net		1			( 22	)
Change in assets and liabilities:
(Increase) in accrued income receivable		( 35	)		( 385	)
Decrease in other assets		377			441
Increase (decrease) in accrued expenses and other liabilities		( 24	)		1,763
Net cash provided by operating activities		23,738			21,322

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available-for-sale		( 282,379	)		( 165,076	)
Proceeds from sale of securities available-for-sale		622			5,463
Proceeds from maturities and calls of securities available-for-sale		100,573			104,636
Purchase of FHLB stock		( 286	)		( 1,148	)
Proceeds from the redemption of FHLB stock		10			1,133
Net (increase) decrease in interest-bearing deposits in financial institutions and federal funds sold		43,918			( 10,695	)
Net (increase) decrease in loans		3,822			( 114,713	)
Net proceeds from the sale of other real estate owned		7			3,415
Purchase of bank premises and equipment		( 927	)		( 852	)
Cash paid for bank acquired		-			( 310	)
Other		( 52	)		( 55	)
Net cash (used in) investing activities		( 134,692	)		( 178,202	)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in deposits		120,353			167,337
(Decrease) in securities sold under agreements to repurchase		( 1,016	)		( 11,541	)
Payments on FHLB borrowings		-			( 2,000	)
Dividends paid		( 7,024	)		( 6,791	)
Stock repurchases		( 571	)		( 1,992	)
Net cash provided by financing activities		111,742			145,013

Net increase (decrease) in cash and due from banks		788			( 11,867	)

CASH AND DUE FROM BANKS
Beginning		24,819			34,617
Ending	$	25,607		$	22,750

Table of Contents

AMES NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (unaudited)

(in thousands)

Nine Months Ended September 30, 2021 and 2020

	2021		2020

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for:
Interest	$	3,987	$	7,134
Income taxes		4,327		3,987

SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES
Transfer of loans receivable to other real estate owned	$	560	$	11

See Notes to Consolidated Financial Statements.

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AMES NATIONAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

1.	Significant Accounting Policies

The consolidated financial statements for the three and nine months ended September 30, 2021 and 2020 are unaudited. In the opinion of the management of Ames National Corporation (the "Company"), these financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly these consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of results which may be expected for an entire year. Certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted in accordance with the requirements for interim financial statements. The interim financial statements and notes thereto should be read in conjunction with the year-end audited financial statements contained in the Company's Annual Report on Form 10 -K for the year ended December 31, 2020 ( the “Annual Report”). The consolidated financial statements include the accounts of the Company and its wholly-owned banking subsidiaries (the “Banks”). All significant intercompany balances and transactions have been eliminated in consolidation.

Goodwill: Goodwill represents the excess of cost over the fair value of net assets acquired. Goodwill resulting from acquisitions is not amortized, but is tested for impairment annually or whenever events change and circumstances indicate that it is more likely than not that an impairment loss has occurred. Goodwill is tested for impairment with an estimation of the fair value of a reporting unit.

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Company’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Company’s stock price. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The Company completed a quantitative assessment of goodwill as of May 31, 2020 which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded there is no impairment of goodwill as of September 30, 2021.

New and Pending Accounting Pronouncements: In June 2016, the FASB issued ASU No. 2016 - 13, Financial Instruments-Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments . The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In October 2019, the FASB voted to approve amendments to the effective date of ASU No. 2016 - 13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The amendment delays the effective date for our Company until interim and annual periods beginning after December 15, 2022. The Company continues collecting and retaining loan and credit data and evaluating various loss estimation models, along with refining the implementation of the software and its approach for determining the expected credit losses under the new guidance. The impact of ASU No. 2016 - 13 on the Company’s financial statements are unknown at this time due to economic uncertainty due to the pandemic. The Company will continue to evaluate the extent of the potential impact.

Table of Contents

Dividends

On July 14, 2021, the Company declared a cash dividend on its common stock, payable on August 13, 2021 to stockholders of record as of July 30, 2021 , equal to $ 0.26 per share; and on August 17, 2021, the Company declared a cash dividend on its common stock, payable on November 15, 2021 to stockholders of record as of November 1, 2021 , equal to $ 0.26 per share.

3.	Earnings Per Share

Earnings per share amounts were calculated using the weighted average shares outstanding during the periods presented. The weighted average outstanding shares for the three months ended September 30, 2021 and 2020 was 9,119,871 and 9,122,747 , respectively. The weighted average outstanding shares for the nine months ended September 30, 2021 and 2020 were 9,121,778 and 9,156,805 , respectively. The Company had no potentially dilutive securities outstanding during the periods presented.

4.	Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2020.

5.	Fair Value Measurements

Assets and liabilities carried at fair value are required to be classified and disclosed according to the process for determining fair value. There are three levels of determining fair value.

Level 1: Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.

Level 2: Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatility, prepayment speeds, credit risk); or inputs derived principally from or can be corroborated by observable market data by correlation or other means.

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Table of Contents

The following table presents the balances of assets measured at fair value on a recurring basis by level as of September 30, 2021 and December 31, 2020 (in thousands) :

Description	Total		Level 1		Level 2		Level 3

2021

U.S. government treasuries	$	138,035	$	138,035	$	-	$	-
U.S. government agencies		113,568		-		113,568		-
U.S. government mortgage-backed securities		158,766		-		158,766		-
State and political subdivisions		276,652		-		276,652		-
Corporate bonds		78,402		-		78,402		-

	$	765,423	$	138,035	$	627,388	$	-

2020

U.S. government treasuries	$	12,053	$	12,053	$	-	$	-
U.S. government agencies		111,199		-		111,199		-
U.S. government mortgage-backed securities		150,195		-		150,195		-
State and political subdivisions		251,584		-		251,584		-
Corporate bonds		71,968		-		71,968		-

	$	596,999	$	12,053	$	584,946	$	-

Level 1 securities include U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets. U.S. government agencies, mortgage-backed securities, state and political subdivisions, and most corporate bonds are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.

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Certain assets are measured at fair value on a nonrecurring basis; that is, they are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment or a change in previously recognized impairment). The following table presents the assets carried on the balance sheet (after specific reserves) by caption and by level within the valuation hierarchy as of September 30, 2021 and December 31, 2020 (in thousands) :

Description	Total		Level 1		Level 2		Level 3

2021

Loans receivable	$	8,989	$	-	$	-	$	8,989
Other real estate owned		768		-		-		768

Total	$	9,757	$	-	$	-	$	9,757

2020

Loans receivable	$	10,306	$	-	$	-	$	10,306
Other real estate owned		218		-		-		218

Total	$	10,524	$	-	$	-	$	10,524

The significant inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020 are as follows (in thousands) :

2020

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Loans receivable

8,989

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

768

Appraisal

Appraisal adjustment

6 %

8 %

( 7 %)

2020

Estimated

Valuation

Range

Fair Value

Techniques

Unobservable Inputs

(Average)

Loans receivable

10,306

Evaluation of collateral

Estimation of value

NM*

Other real estate owned

218

Appraisal

Appraisal adjustment

6 %

8 %

( 7 %)

* Evaluations of the underlying assets are completed for each collateral dependent impaired loan with a specific reserve. The types of collateral vary widely and could include accounts receivables, inventory, a variety of equipment and real estate. Collateral evaluations are reviewed and discounted as appropriate based on knowledge of the specific type of collateral. In the case of real estate, an independent appraisal may be obtained. Types of discounts considered included aging of receivables, condition of the collateral, potential market for the collateral and estimated disposal costs. These discounts will vary from loan to loan, thus providing a range would not be meaningful.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis.

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The following table includes the carrying amounts and estimated fair values of the Company’s financial assets and liabilities as of September 30, 2021 and December 31, 2020 (in thousands):

		2021				2020
	Fair Value			Estimated				Estimated
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value

Financial assets:
Cash and due from banks	Level 1	$	25,607	$	25,607	$	24,819	$	24,819
Interest-bearing deposits in financial institutions and federal funds sold	Level 1		122,786		122,786		166,704		166,704
Securities available-for-sale	See previous table		765,423		765,423		596,999		596,999
FHLB and FRB stock	Level 2		3,424		3,424		3,148		3,148
Loans receivable, net	Level 2		1,126,059		1,102,573		1,129,505		1,116,352
Loans held for sale	Level 2		378		378		1,621		1,621
Accrued income receivable	Level 1		11,178		11,178		11,143		11,143
Financial liabilities:
Deposits	Level 2	$	1,836,708	$	1,839,016	$	1,716,446	$	1,720,023
Securities sold under agreements to repurchase	Level 1		36,277		36,277		37,293		37,293
FHLB advances	Level 2		3,000		3,069		3,000		3,111
Accrued interest payable	Level 1		450		450		829		829

The methodologies used to determine fair value as of September 30, 2021 did not change from the methodologies described in the December 31, 2020 Annual Financial Statements.

Commitments to extend credit and standby letters of credit : The fair values of commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreement and credit worthiness of the counterparties. The carrying value and fair value of the commitments to extend credit and standby letters of credit are not considered significant.

Limitations : Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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6.	Debt Securities

The amortized cost of securities available-for-sale and their approximate fair values as of September 30, 2021 and December 31, 2020 are summarized below (in thousands):

2021:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	138,401	$	350	$	( 716	)	$	138,035
U.S. government agencies		110,832		3,172		( 436	)		113,568
U.S. government mortgage-backed securities		158,104		1,839		( 1,177	)		158,766
State and political subdivisions		271,918		5,429		( 695	)		276,652
Corporate bonds		75,154		3,345		( 97	)		78,402
	$	754,409	$	14,135	$	( 3,121	)	$	765,423

2020:			Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
	Cost		Gains		Losses			Fair Value

U.S. government treasuries	$	11,725	$	328	$	-		$	12,053
U.S. government agencies		106,337		4,875		( 13	)		111,199
U.S. government mortgage-backed securities		146,889		3,337		( 31	)		150,195
State and political subdivisions		243,438		8,182		( 36	)		251,584
Corporate bonds		67,247		4,722		( 1	)		71,968
	$	575,636	$	21,444	$	( 81	)	$	596,999

The amortized cost and fair value of debt securities available-for-sale as of September 30, 2021, are shown below by expected maturity. Expected maturity will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties ( in thousands ).

	Amortized		Estimated
	Cost		Fair Value

Due in one year or less	$	47,083	$	47,560
Due after one year through five years		353,573		358,552
Due after five years through ten years		321,680		326,523
Due after ten years		32,073		32,788
Total	$	754,409	$	765,423

Securities with a carrying value of $ 218.6 million and $ 202.0 million at September 30, 2021 and December 31, 2020, respectively, were pledged on public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law.

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The proceeds and gains on securities available-for-sale for the three and nine months ended September 30, 2021 and 2020 are summarized below ( in thousands ):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Proceeds from sales of securities available-for-sale	$	622	$	-	$	622	$	5,463
Gross realized gains on securities available-for-sale		24		-		24		430
Gross realized losses on securities available-for-sale		-		-		-		-

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020 are summarized as follows (in thousands) :

	Less than 12 Months					12 Months or More					Total
2021:	Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses			Estimated Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government treasuries	$	102,182	$	( 716	)	$	-	$	-		$	102,182	$	( 716	)
U.S. government agencies		29,722		( 436	)		-		-			29,722		( 436	)
U.S. government mortgage-backed securities		100,746		( 1,177	)		-		-			100,746		( 1,177	)
State and political subdivisions		67,527		( 672	)		896		( 23	)		68,423		( 695	)
Corporate bonds		9,378		( 97	)		-		-			9,378		( 97	)
	$	309,555	$	( 3,098	)	$	896	$	( 23	)	$	310,451	$	( 3,121	)

	Less than 12 Months					12 Months or More					Total
2020:	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

Securities available-for-sale:
U.S. government agencies	$	6,016	$	( 7	)	$	896	$	( 6	)	$	6,912	$	( 13	)
U.S. government mortgage-backed securities		5,097		( 31	)		-		-			5,097		( 31	)
State and political subdivisions		7,875		( 34	)		180		( 2	)		8,055		( 36	)
Corporate bonds		534		( 1	)		-		-			534		( 1	)
	$	19,522	$	( 73	)	$	1,076	$	( 8	)	$	20,598	$	( 81	)

Gross unrealized losses on debt securities totaled $ 3.1 million as of September 30, 2021. These unrealized losses are generally due to changes in interest rates or general market conditions. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, state or political subdivision, or corporations. Management then determines whether downgrades by bond rating agencies have occurred, and reviews industry analysts’ reports. The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates. Management concluded that the gross unrealized losses on debt securities were temporary. Due to potential changes in conditions, it is at least reasonably possible that changes in fair values and management’s assessments will occur in the near term and that such changes could materially affect the amounts reported in the Company’s financial statements.

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7.	Loans Receivable and Credit Disclosures

The composition of loans receivable as of September 30, 2021 and December 31, 2020 is as follows ( in thousands ):

	2021			2020

Real estate - construction	$	37,476		$	45,497
Real estate - 1 to 4 family residential		231,468			213,562
Real estate - commercial		519,112			496,357
Real estate - agricultural		153,247			151,992
Commercial ¹		85,569			122,535
Agricultural		101,087			102,586
Consumer and other		15,346			15,048
		1,143,305			1,147,577
Less:
Allowance for loan losses		( 16,830	)		( 17,215	)
Deferred loan (fees) and costs, net ²		( 416	)		( 857	)
Loans receivable, net	$	1,126,059		$	1,129,505

¹	Commercial loan portfolio includes $ 14.8 million and $ 50.9 million of Paycheck Protection Program ("PPP") loans as of September 30, 2021 and December 31, 2020, respectively.
²	Deferred loan (fees) and costs, net includes $ 0.7 million and $ 0.9 million of fees, net of costs, related to the PPP loans as of September 30, 2021 and December 31, 2020, respectively.

The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief and Economic Security Act (CARES Act), enacted on March 27, 2020, and expanded by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, enacted December 27, 2020 and the American Rescue Plan Act, enacted March 11, 2021, in response to the Coronavirus Disease 2019 (COVID- 19 ) pandemic. The PPP is administered by the Small Business Administration (SBA). PPP loans may be forgiven by the SBA and are 100 percent guaranteed by the SBA.

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Activity in the allowance for loan losses, on a disaggregated basis, for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands) :

	Three Months Ended September 30, 2021
				1-4 Family
	Construction			Residential			Commercial		Agricultural								Consumer
	Real Estate			Real Estate			Real Estate		Real Estate			Commercial		Agricultural			and Other			Total
Balance, June 30, 2021	$	738		$	2,603		$	8,889	$	1,614		$	1,140	$	1,675		$	234		$	16,893
Provision (credit) for loan losses		( 156	)		59			33		( 36	)		64		( 59	)		1			( 94	)
Recoveries of loans charged-off		-			1			1		-			1		43			1			47
Loans charged-off		-			( 4	)		-		-			-		-			( 12	)		( 16	)
Balance, September 30, 2021	$	582		$	2,659		$	8,923	$	1,578		$	1,205	$	1,659		$	224		$	16,830

	Nine Months Ended September 30, 2021
				1-4 Family
	Construction			Residential			Commercial			Agricultural									Consumer
	Real Estate			Real Estate			Real Estate			Real Estate			Commercial			Agricultural			and Other			Total
Balance, December 31, 2020	$	725		$	2,581		$	8,930		$	1,595		$	1,453		$	1,696		$	235		$	17,215
Provision (credit) for loan losses		( 143	)		( 155	)		( 10	)		( 17	)		( 138	)		( 85	)		8			( 540	)
Recoveries of loans charged-off		-			267			3			-			3			48			8			329
Loans charged-off		-			( 34	)		-			-			( 113	)		-			( 27	)		( 174	)
Balance, September 30, 2021	$	582		$	2,659		$	8,923		$	1,578		$	1,205		$	1,659		$	224		$	16,830

	Three Months Ended September 30, 2020
				1-4 Family
	Construction			Residential			Commercial		Agricultural									Consumer
	Real Estate			Real Estate			Real Estate		Real Estate			Commercial			Agricultural			and Other			Total
Balance, June 30, 2020	$	849		$	2,505		$	6,864	$	1,713		$	1,994		$	1,830		$	250		$	16,005
Provision (credit) for loan losses		( 105	)		80			583		( 15	)		( 5	)		( 14	)		17			541
Recoveries of loans charged-off		-			2			1		-			9			-			273			285
Loans charged-off		-			( 1	)		-		-			( 582	)		( 48	)		( 268	)		( 899	)
Balance, September 30, 2020	$	744		$	2,586		$	7,448	$	1,698		$	1,416		$	1,768		$	272		$	15,932

	Nine Months Ended September 30, 2020
			1-4 Family
	Construction		Residential			Commercial			Agricultural								Consumer
	Real Estate		Real Estate			Real Estate			Real Estate		Commercial			Agricultural			and Other			Total
Balance, December 31, 2019	$	672	$	2,122		$	5,362		$	1,326	$	1,458		$	1,478		$	201		$	12,619
Provision for loan losses		71		477			2,527			372		573			338			66			4,424
Recoveries of loans charged-off		1		5			3			-		13			-			277			299
Loans charged-off		-		( 18	)		( 444	)		-		( 628	)		( 48	)		( 272	)		( 1,410	)
Balance, September 30, 2020	$	744	$	2,586		$	7,448		$	1,698	$	1,416		$	1,768		$	272		$	15,932

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Allowance for loan losses disaggregated on the basis of impairment analysis method as of September 30, 2021 and December 31, 2020 is as follows (in thousands) :

2021			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	40	$	1,326	$	-	$	18	$	132	$	23	$	1,539
Collectively evaluated for impairment		582		2,619		7,597		1,578		1,187		1,527		201		15,291
Balance September 30, 2021	$	582	$	2,659	$	8,923	$	1,578	$	1,205	$	1,659	$	224	$	16,830

2020			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	150	$	1,486	$	-	$	115	$	40	$	28	$	1,819
Collectively evaluated for impairment		725		2,431		7,444		1,595		1,338		1,656		207		15,396
Balance December 31, 2020	$	725	$	2,581	$	8,930	$	1,595	$	1,453	$	1,696	$	235	$	17,215

Loans receivable disaggregated on the basis of impairment analysis method as of September 30, 2021 and December 31, 2020 is as follows (in thousands) :

2021			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	-	$	1,000	$	9,954	$	576	$	295	$	638	$	30	$	12,493
Collectively evaluated for impairment		37,476		230,468		509,158		152,671		85,274		100,449		15,316		1,130,812

Balance September 30, 2021	$	37,476	$	231,468	$	519,112	$	153,247	$	85,569	$	101,087	$	15,346	$	1,143,305

2020			1-4 Family
	Construction		Residential		Commercial		Agricultural						Consumer
	Real Estate		Real Estate		Real Estate		Real Estate		Commercial		Agricultural		and Other		Total
Individually evaluated for impairment	$	167	$	1,340	$	10,258	$	1,664	$	940	$	859	$	45	$	15,273
Collectively evaluated for impairment		45,330		212,222		486,099		150,328		121,595		101,727		15,003		1,132,304

Balance December 31, 2020	$	45,497	$	213,562	$	496,357	$	151,992	$	122,535	$	102,586	$	15,048	$	1,147,577

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payment of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The Company applies its normal loan review procedures to identify loans that should be evaluated for impairment.

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Impaired loans, on a disaggregated basis, as of September 30, 2021 and December 31, 2020 (in thousands) :

	2021						2020
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	-	$	167	$	167	$	-
Real estate - 1 to 4 family residential		694		747		-		416		475		-
Real estate - commercial		127		142		-		242		578		-
Real estate - agricultural		576		631		-		1,664		1,698		-
Commercial		238		271		-		274		318		-
Agricultural		323		523		-		377		542		-
Consumer and other		7		9		-		8		10		-
Total loans with no specific reserve:		1,965		2,323		-		3,148		3,788		-

With an allowance recorded:
Real estate - construction		-		-		-		-		-		-
Real estate - 1 to 4 family residential		306		316		40		924		1,278		150
Real estate - commercial		9,827		10,081		1,326		10,016		10,157		1,486
Real estate - agricultural		-		-		-		-		-		-
Commercial		57		58		18		666		1,247		115
Agricultural		315		315		132		482		484		40
Consumer and other		23		24		23		37		39		28
Total loans with specific reserve:		10,528		10,794		1,539		12,125		13,205		1,819

Total
Real estate - construction		-		-		-		167		167		-
Real estate - 1 to 4 family residential		1,000		1,063		40		1,340		1,753		150
Real estate - commercial		9,954		10,223		1,326		10,258		10,735		1,486
Real estate - agricultural		576		631		-		1,664		1,698		-
Commercial		295		329		18		940		1,565		115
Agricultural		638		838		132		859		1,026		40
Consumer and other		30		33		23		45		49		28

	$	12,493	$	13,117	$	1,539	$	15,273	$	16,993	$	1,819

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Average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2021 and 2020 (in thousands) :

	Three Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	-	$	-	$	83	$	-
Real estate - 1 to 4 family residential		813		8		305		-
Real estate - commercial		132		-		11,091		-
Real estate - agricultural		602		-		1,966		-
Commercial		255		-		735		21
Agricultural		318		-		813		340
Consumer and other		6		-		8		-
Total loans with no specific reserve:		2,126		8		15,001		361

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		164		-		957		-
Real estate - commercial		9,922		-		-		-
Real estate - agricultural		-		-		-		-
Commercial		29		-		627		-
Agricultural		327		-		531		-
Consumer and other		30		-		30		-
Total loans with specific reserve:		10,472		-		2,145		-

Total
Real estate - construction		-		-		83		-
Real estate - 1 to 4 family residential		977		8		1,262		-
Real estate - commercial		10,054		-		11,091		-
Real estate - agricultural		602		-		1,966		-
Commercial		284		-		1,362		21
Agricultural		645		-		1,344		340
Consumer and other		36		-		38		-

	$	12,598	$	8	$	17,146	$	361

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	Nine Months Ended September 30,
	2021				2020
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no specific reserve recorded:
Real estate - construction	$	84	$	-	$	41	$	-
Real estate - 1 to 4 family residential		587		19		294		-
Real estate - commercial		162		297		8,221		-
Real estate - agricultural		990		25		1,202		6
Commercial		400		-		586		23
Agricultural		339		14		1,896		340
Consumer and other		6		-		26		-
Total loans with no specific reserve:		2,568		355		12,266		369

With an allowance recorded:
Real estate - construction		-		-		-		-
Real estate - 1 to 4 family residential		336		-		938		-
Real estate - commercial		9,969		-		244		-
Real estate - agricultural		-		-		-		-
Commercial		181		-		356		-
Agricultural		385		-		380		-
Consumer and other		35		-		15		-
Total loans with specific reserve:		10,906		-		1,933		-

Total
Real estate - construction		84		-		41		-
Real estate - 1 to 4 family residential		923		19		1,232		-
Real estate - commercial		10,131		297		8,465		-
Real estate - agricultural		990		25		1,202		6
Commercial		581		-		942		23
Agricultural		724		14		2,276		340
Consumer and other		41		-		41		-

	$	13,474	$	355	$	14,199	$	369

The interest foregone on nonaccrual loans for the three months ended September 30, 2021 and 2020 was approximately $ 154 thousand and $ 247 thousand, respectively. The interest foregone on nonaccrual loans for the nine months ended September 30, 2021 and 2020 was approximately $ 523 thousand and $ 747 thousand, respectively.

Nonaccrual loans at September 30, 2021 and December 31, 2020 were $ 12.5 million and $ 15.3 million, respectively.

The Company had loans meeting the definition of a troubled debt restructuring (TDR) of $ 10.6 million as of September 30, 2021, all of which were included in impaired and nonaccrual loans. The Company had TDRs of $ 11.3 million as of December 31, 2020, all of which were included in impaired and nonaccrual loans.

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The Company’s TDRs, on a disaggregated basis, occurring in the three and nine months ended September 30, 2021 and 2020, were as follows ( dollars in thousands ):

	Three Months Ended September 30,
	2021						2020
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-
Real estate - 1 to 4 family residential		-		-		-		-		-		-
Real estate - commercial		-		-		-		1		10,157		10,157
Real estate - agricultural		-		-		-		-		-		-
Commercial		1		6		6		-		-		-
Agricultural		-		-		-		3		56		56
Consumer and other		-		-		-		1		27		27

		1	$	6	$	6		5	$	10,240	$	10,240

	Nine Months Ended September 30,
	2021						2020
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number of		Recorded		Recorded		Number of		Recorded		Recorded
	Contracts		Investment		Investment		Contracts		Investment		Investment

Real estate - construction		-	$	-	$	-		-	$	-	$	-
Real estate - 1 to 4 family residential		3		578		578		-		-		-
Real estate - commercial		-		-		-		2		10,341		10,341
Real estate - agricultural		-		-		-		-		-		-
Commercial		2		64		64		1		61		61
Agricultural		-		-		-		3		56		56
Consumer and other		-		-		-		1		27		27

		5	$	642	$	642		7	$	10,485	$	10,485

During the three months ended September 30, 2021, the Company granted concessions to one borrower facing financial difficulties which was unrelated to COVID- 19. The loan was restructured with a lower interest rate and accrued interest was waived. During the three months ended September 30, 2020, the Company granted concessions to three borrowers facing financial difficulties which were unrelated to COVID- 19. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate. During the nine months ended September 30, 2021, the Company granted concessions to four borrowers facing financial difficulties. The loans were restructured with a lower interest rate or amortization periods longer than a typical loan. During the nine months ended September 30, 2020, the Company granted concessions to five borrowers facing financial difficulties. Payments on these loans were deferred for an extended period of time and the interest rate was reduced below the market interest rate.

There were no TDR loans that were modified during the twelve months ended September 30, 2021 that had payment defaults. The Company considers TDR loans to have payment default when it is past due 60 days or more.

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There were no net charge-offs and $ 15 thousand of net charge-offs related to TDRs for the three months ended September 30, 2021 and 2020, respectively. There were $ 262 thousand of net recoveries and $ 31 thousand of net charge-offs related to TDRs for the nine months ended September 30, 2021 and 2020, respectively. No additional specific reserve was provided for the three and nine months ended September 30, 2021 and 2020.

Section 4013 of the CARES Act, “Temporary Relief From TDRs,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID- 19 pandemic. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID- 19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID- 19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID- 19. The interagency statement provided that short-term modifications made on a good faith basis in response to COVID- 19 to borrowers who were current prior to any relief, are not to be considered TDRs.

As of December 31, 2020, the Company had 24 COVID- 19 related loan modifications still in the modification period with a total outstanding principal balance of $ 45.9 million. As of September 30, 2021, substantially all the remaining COVID- 19 related loan modifications have returned to normal payment status. Modified loans continued to accrue interest and were evaluated for past due status based on the revised payment terms.

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An aging analysis of the recorded investments in loans, on a disaggregated basis, as of September 30, 2021 and December 31, 2020, is as follows (in thousands) :

2021			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	140	$	-	$	140	$	37,336	$	37,476	$	-
Real estate - 1 to 4 family residential		1,080		170		1,250		230,218		231,468		84
Real estate - commercial		-		-		-		519,112		519,112		-
Real estate - agricultural		1,139		-		1,139		152,108		153,247		-
Commercial		495		-		495		85,074		85,569		-
Agricultural		136		315		451		100,636		101,087		-
Consumer and other		56		-		56		15,290		15,346		-

	$	3,046	$	485	$	3,531	$	1,139,774	$	1,143,305	$	84

2020			90 Days								90 Days
	30-89		or Greater		Total						or Greater
	Past Due		Past Due		Past Due		Current		Total		Accruing

Real estate - construction	$	169	$	167	$	336	$	45,161	$	45,497	$	-
Real estate - 1 to 4 family residential		1,523		176		1,699		211,863		213,562		6
Real estate - commercial		152		56		208		496,149		496,357		-
Real estate - agricultural		574		1,618		2,192		149,800		151,992		-
Commercial		283		3		286		122,249		122,535		3
Agricultural		79		458		537		102,049		102,586		30
Consumer and other		18		16		34		15,014		15,048		-

	$	2,798	$	2,494	$	5,292	$	1,142,285	$	1,147,577	$	39

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The credit risk profile by internally assigned grade, on a disaggregated basis, as of September 30, 2021 and December 31, 2020 is as follows (in thousands) :

2021	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	35,797	$	381,055	$	125,868	$	72,151	$	84,960	$	699,831
Watch		326		79,194		21,037		8,077		14,717		123,351
Special Mention		1,353		24,687		167		1,370		-		27,577
Substandard		-		24,222		5,599		3,676		772		34,269
Substandard-Impaired		-		9,954		576		295		638		11,463

	$	37,476	$	519,112	$	153,247	$	85,569	$	101,087	$	896,491

2020	Construction		Commercial		Agricultural
	Real Estate		Real Estate		Real Estate		Commercial		Agricultural		Total

Pass	$	39,980	$	346,591	$	110,925	$	101,858	$	80,075	$	679,429
Watch		5,350		88,113		33,144		15,897		20,793		163,297
Special Mention		-		23,753		175		52		-		23,980
Substandard		-		27,642		6,084		3,788		859		38,373
Substandard-Impaired		167		10,258		1,664		940		859		13,888

	$	45,497	$	496,357	$	151,992	$	122,535	$	102,586	$	918,967

The credit risk profile based on payment activity, on a disaggregated basis, as of September 30, 2021 and December 31, 2020 is as follows (in thousands) :

2021	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	230,385	$	15,343	$	245,728
Non-performing		1,083		3		1,086

	$	231,468	$	15,346	$	246,814

2020	1-4 Family
	Residential		Consumer
	Real Estate		and Other		Total

Performing	$	212,282	$	15,003	$	227,285
Non-performing		1,280		45		1,325

	$	213,562	$	15,048	$	228,610

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8.	Intangible assets

The following sets forth the carrying amounts and accumulated amortization of the intangible assets at September 30, 2021 and December 31, 2020 (in thousands) :

	2021				2020
	Gross		Accumulated		Gross		Accumulated
	Amount		Amortization		Amount		Amortization

Core deposit intangible asset	$	6,411	$	3,913	$	6,411	$	3,493
Customer list		535		379		535		320

Total	$	6,946	$	4,292	$	6,946	$	3,813

The weighted average remaining life of the intangible assets is approximately 4 years as of September 30, 2021 and December 31, 2020.

The following sets forth the activity related to the intangible assets for the three and nine months ended September 30, 2021 and 2020 (in thousands) :

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020

Beginning intangible assets, net	$	2,813		$	3,525		$	3,133		$	3,959
Amortization		( 159	)		( 216	)		( 479	)		( 650	)

Ending intangible assets, net	$	2,654		$	3,309		$	2,654		$	3,309

Estimated remaining amortization expense on intangible assets for the years ending December 31 is as follows (in thousands) :

2021	$	148
2022		575
2023		502
2024		337
2025		300
2026		268
After		524

Total	$	2,654

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9.	Pledged Collateral Related to Securities Sold Under Repurchase Agreements

The repurchase agreements mature daily and the following sets forth the pledged collateral at estimated fair value related to securities sold under repurchase agreements as of September 30, 2021 and December 31, 2020 (in thousands) :

	2021		2020
Securities sold under agreements to repurchase:
U.S. government treasuries	$	6,034	$	2,069
U.S. government agencies		38,985		39,362
U.S. government mortgage-backed securities		11,307		14,320

Total pledged collateral	$	56,326	$	55,751

In the event the repurchase agreements exceed the estimated fair value of the pledged securities available-for-sale, the Company has unpledged securities available-for-sale that may be pledged on the repurchase agreements.

10.

Borrowings

On June 11, 2021, the Company entered into a promissory note and line of credit agreement with an unaffiliated bank, providing for a five -year four million dollar line of credit facility. The Company had no outstanding borrowings on the line of credit as of September 30, 2021.

11.

Income Taxes

The tax effects of temporary differences related to income taxes are included in deferred income taxes. The change in deferred income taxes since December 31, 2020 is due primarily to the decrease in the unrealized gains on investment securities.

12.

Commitments, Contingencies and Concentrations of Credit Risk

On April 16, 2021, the Company entered into a $ 1.7 million commitment with a contractor to build a new branch in West Des Moines, Iowa. The Company has $ 1.5 million of the commitment remaining at September 30, 2021.

13.

Regulatory Matters

The Company and the Banks are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements (as shown in the following table) can result in certain mandatory and possibly additional discretionary actions by regulators, which, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Banks' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Management believed the Company and the Banks met all capital adequacy requirements to which they were subject as of September 30, 2021.

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The Company and the Banks’ capital amounts and ratios as of September 30, 2021 and December 31, 2020 are as follows ( dollars in thousands ):

											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of September 30, 2021:
Total capital (to risk- weighted assets):
Consolidated	$	204,524		15.3	%	$	140,431		10.50	%		N/A		N/A
Boone Bank & Trust		15,611		16.0			10,269		10.50			9,780		10.0	%
First National Bank		101,785		14.7			72,926		10.50			69,454		10.0
Iowa State Savings Bank		23,755		16.5			15,102		10.50			14,383		10.0
Reliance State Bank		26,824		14.4			19,581		10.50			18,648		10.0
State Bank & Trust		20,327		15.0			14,247		10.50			13,568		10.0
United Bank & Trust		11,873		15.7			7,926		10.50			7,549		10.0

Tier 1 capital (to risk- weighted assets):
Consolidated	$	187,806		14.0	%	$	113,682		8.50	%		N/A		N/A
Boone Bank & Trust		14,665		15.0			8,313		8.50			7,824		8.0	%
First National Bank		93,084		13.4			59,035		8.50			55,563		8.0
Iowa State Savings Bank		22,734		15.8			12,226		8.50			11,507		8.0
Reliance State Bank		24,491		13.1			15,851		8.50			14,919		8.0
State Bank & Trust		18,643		13.7			11,533		8.50			10,855		8.0
United Bank & Trust		10,927		14.5			6,417		8.50			6,039		8.0

Tier 1 capital (to average- assets):
Consolidated	$	187,806		9.2	%	$	81,851		4.00	%		N/A		N/A
Boone Bank & Trust		14,665		9.4			6,269		4.00			7,836		5.0	%
First National Bank		93,084		8.8			42,354		4.00			52,942		5.0
Iowa State Savings Bank		22,734		9.4			9,631		4.00			12,038		5.0
Reliance State Bank		24,491		9.1			10,731		4.00			13,413		5.0
State Bank & Trust		18,643		8.7			8,530		4.00			10,663		5.0
United Bank & Trust		10,927		9.1			4,799		4.00			5,999		5.0

Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	187,806		14.0	%	$	93,621		7.00	%		N/A		N/A
Boone Bank & Trust		14,665		15.0			6,846		7.00			6,357		6.5	%
First National Bank		93,084		13.4			48,617		7.00			45,145		6.5
Iowa State Savings Bank		22,734		15.8			10,068		7.00			9,349		6.5
Reliance State Bank		24,491		13.1			13,054		7.00			12,121		6.5
State Bank & Trust		18,643		13.7			9,498		7.00			8,819		6.5
United Bank & Trust		10,927		14.5			5,284		7.00			4,907		6.5

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						To Be Well
						Capitalized Under
						Prompt Corrective
	Actual					Action Provisions
	Amount		Ratio			Amount		Ratio

As of December 31, 2020:
Community Bank Leverage Ratio:
(Tier 1 capital to average assets for leverage ratio):

Boone Bank & Trust	$	13,967		9.2	%	$	12,170		8.0	%
First National Bank		86,071		8.6			80,393		8.0
Iowa State Savings Bank		21,610		9.4			18,321		8.0
Reliance State Bank		23,278		9.4			19,741		8.0
State Bank & Trust		16,564		8.5			15,657		8.0
United Bank & Trust		10,539		9.2			9,180		8.0

The Company and the Banks are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules include the implementation of a 2.5 percent capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. A banking organization with a capital conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At September 30, 2021, the capital ratios for the Company and the Banks were sufficient to meet the conservation buffer.

The Banks elected to stop reporting their capital ratios under the Community Bank Leverage Ratio as of September 30, 2021.

14.

Subsequent Events

Management evaluated subsequent events through the date the financial statements were issued. There were no significant events or transactions occurring after September 30, 2021, but prior to November 8, 2021, that provided additional evidence about conditions that existed at September 30, 2021. There were no other significant events or transactions that provided evidence about conditions that did not exist at September 30, 2021.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Ames National Corporation (the “Company”) is a bank holding company established in 1975 that owns and operates six bank subsidiaries in central Iowa (the “Banks”). The following discussion is provided for the consolidated operations of the Company and its Banks, First National Bank, Ames, Iowa (First National), State Bank & Trust Co. (State Bank), Boone Bank & Trust Co. (Boone Bank), Reliance State Bank (Reliance Bank), United Bank & Trust NA (United Bank) and Iowa State Savings Bank (Iowa State Bank). The purpose of this discussion is to focus on significant factors affecting the Company's financial condition and results of operations.

The Company does not engage in any material business activities apart from its ownership of the Banks. Products and services offered by the Banks are for commercial and consumer purposes including loans, deposits and wealth management services. Wealth management services includes financial planning and managing trust, agencies, estates and investment brokerage accounts. The Company employs sixteen individuals to assist with financial reporting, human resources, audit, compliance, marketing, technology systems, training, real estate valuation services and the coordination of management activities, in addition to 249 full-time equivalent individuals employed by the Banks.

The Company’s primary competitive strategy is to utilize seasoned and competent Bank management and local decision making authority to provide customers with faster response times and more flexibility in the products and services offered. This strategy is viewed as providing an opportunity to increase revenues through creating a competitive advantage over other financial institutions. The Company also strives to remain operationally efficient to provide better profitability while enabling the Company to offer more competitive loan and deposit rates.

The principal sources of Company revenues and cash flow are: (i) interest and fees earned on loans made by the Company and Banks; (ii) interest on fixed income investments held by the Banks; (iii) fees on wealth management services provided by those Banks exercising trust powers; (iv) service fees on deposit accounts maintained at the Banks; (v) gain on sale of loans; and (vi) merchant and card fees. The Company’s principal expenses are: (i) interest expense on deposit accounts and other borrowings; (ii) provision for loan losses; (iii) salaries and employee benefits; (iv) data processing costs associated with maintaining the Banks’ loan and deposit functions; (v) occupancy expenses for maintaining the Bank’s facilities; and (vi) professional fees. The largest component contributing to the Company’s net income is net interest income, which is the difference between interest earned on earning assets (primarily loans and investments) and interest paid on interest-bearing liabilities (primarily deposits and other borrowings). One of management’s principal functions is to manage the spread between interest earned on earning assets and interest paid on interest bearing liabilities in an effort to maximize net interest income while maintaining an appropriate level of interest rate risk.

The Company had net income of $6.7 million, or $0.74 per share, for the three months ended September 30, 2021, compared to net income of $5.7 million, or $0.62 per share, for the three months ended September 30, 2020. The increase in earnings is primarily the result of a reduction in interest expense due to declines in market interest rates and a decrease in provision for loan losses due to a higher level of provision in 2020 as a result of uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

Net loan recoveries totaled $31 thousand for the three months ended September 30, 2021 compared to net loan charge offs of $614 thousand for the three months ended September 30, 2020. A (credit) for loan losses of ($94) thousand was recognized for the three months ended September 30, 2021 as compared to a $541 thousand provision for loan loss for the three months ended September 30, 2020. The credit for loan losses was primarily due to improving economic conditions. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

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The following management discussion and analysis will provide a review of important items relating to:

●	Challenges and COVID-19 Status, Risks and Uncertainties

●	Key Performance Indicators and Industry Results

●	Critical Accounting Policies

●	Non-GAAP Financial Measures

●	Income Statement Review

●	Balance Sheet Review

●	Asset Quality Review and Credit Risk Management

●	Liquidity and Capital Resources

●	Forward-Looking Statements and Business Risks

Challenges and COVID-19 Status, Risks and Uncertainties

Management has identified certain events or circumstances that may negatively impact the Company’s financial condition and results of operations in the future and is attempting to position the Company to best respond to those challenges. These challenges are addressed in the Company’s most recent Annual Report on Form 10-K filed on March 12, 2021.

The continuation of the COVID-19 pandemic has significantly heightened the level of challenges, risks and uncertainties facing our business and continuation of operations, including the following:

●

Although the economy continues to rebound from the depths of the economic slowdown associated with the pandemic, some of the Company’s customers may continue to experience decreased revenues, shortage of labor or shortage of goods, which may correlate to an inability to make timely loan payments or maintain payrolls. This, in turn, could adversely impact the revenues and earnings of the Company by, among other things, requiring further increases in the allowance for loan losses and increases in the level of charge-offs in the loan portfolio. Management may increase the allowance if the effects of the COVID-19 pandemic negatively impact the loan portfolio;

●

Market interest rates remain at historic lows and if prolonged, could adversely affect our net interest income, net interest margin and earnings;

●

We may experience a slowdown in demand for our products and services as the effects of the pandemic continue to linger, including the demand for traditional loans, although we believe any decline experienced to date has largely been offset by the new volume of PPP loans under the CARES Act and other governmental programs established in response to the pandemic. We had 227 PPP loans with an aggregate outstanding balance of $14.8 million as of September 30, 2021;

●

As evidenced by the level of loans classified as substandard and watch as of September 30, 2021, we continue to experience a higher risk of delinquencies, defaults and foreclosures, as well as declining collateral values and further impairment of the ability of our borrowers to repay their loans, all of which may result in additional credit charges and other losses in our loan portfolio;

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●

Throughout the COVID-19 pandemic we actively worked with loan customers to evaluate prudent loan modification terms. As of September 30, 2021, substantially all COVID-19 related loan modifications have returned to normal payment status; and

●

In meeting our objective to maintain our capital levels and liquidity position through the COVID-19 pandemic, our Board of Directors may reduce or determine to altogether forego payment of future dividends in order to maintain and/or strengthen our capital and liquidity position.

Key Performance Indicators and Industry Results

Certain key performance indicators for the Company and the industry are presented in the following chart. The industry figures are compiled by the Federal Deposit Insurance Corporation (the “FDIC”) and are derived from 4,951 commercial banks and savings institutions insured by the FDIC. Management reviews these indicators on a quarterly basis for purposes of comparing the Company’s performance from quarter-to-quarter against the industry as a whole.

Selected Indicators for the Company and the Industry

	3 Months			9 Months									Years Ended December 31,
	Ended			Ended			3 Months Ended
	September 30, 2021						June 30, 2021						2020						2019
	Company						Company			Industry*			Company			Industry*			Company			Industry*

Return on assets		1.29	%		1.20	%		1.12	%		1.24	%		1.01	%		0.72	%		1.14	%		1.29	%

Return on equity		12.60	%		11.85	%		11.39	%		12.37	%		9.48	%		6.88	%		9.48	%		11.38	%

Net interest margin		2.97	%		2.89	%		2.84	%		2.50	%		3.13	%		2.82	%		3.21	%		3.36	%

Efficiency ratio		51.35	%		54.30	%		56.01	%		61.01	%		55.83	%		59.78	%		58.51	%		56.63	%

Capital ratio		10.27	%		10.14	%		9.84	%		10.12	%		10.66	%		8.81	%		12.05	%		9.66	%

*Latest available data

Key performances indicators include:

●	Return on Assets

This ratio is calculated by dividing net income by average assets. It is used to measure how effectively the assets of the Company are being utilized in generating income. The Company's annualized return on average assets was 1.29% and 1.21% for the three months ended September 30, 2021 and 2020, respectively. This ratio increase was primarily the result of a decrease in the provision for loan loss and a reduction in interest expense due to market rate decreases.

●	Return on Equity

This ratio is calculated by dividing net income by average equity. It is used to measure the net income or return the Company generated for the shareholders’ equity investment in the Company. The Company's return on average equity was at 12.60% and 11.18% for the three months ended September 30, 2021 and 2020, respectively. This ratio increase was primarily the result of a decrease in the provision for loan loss and a reduction in interest expense due to market rate decreases.

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●	Net Interest Margin

The net interest margin for the three months ended September 30, 2021 and 2020 was 2.97% and 3.21%, respectively. The ratio is calculated by dividing tax equivalent net interest income by average earning assets. Earning assets are primarily made up of loans and investments that earn interest. This ratio is used to measure how well the Company is able to maintain interest rates on earning assets above those of interest-bearing liabilities, which is the interest expense paid on deposits and other borrowings.

●	Efficiency Ratio

This ratio is calculated by dividing noninterest expense by the sum of net interest income and noninterest income. The ratio is a measure of the Company’s ability to manage noninterest expenses. The Company’s efficiency ratio was 51.35% and 54.80% for the three months ended September 30, 2021 and 2020, respectively. The efficiency ratio has improved compared to the same quarter last year primarily due to a reduction in market interest rates on deposits and a decline in the number of employees.

●	Capital Ratio

The average capital ratio is calculated by dividing average total equity capital by average total assets. It measures the level of average assets that are funded by shareholders’ equity. Given an equal level of risk in the financial condition of two companies, the higher the capital ratio, generally the more financially sound the company. The Company’s capital ratio of 10.27% as of September 30, 2021 is similar to the industry average of 10.12% as of June 30, 2021.

Industry Results:

The FDIC Quarterly Banking Profile reported the following results for the second quarter of 2021:

Quarterly Net Income Continued to Increase Year Over Year, Driven by a Second Consecutive Quarter of Negative Provision Expense

Net income totaled $70.4 billion in second quarter 2021, an increase of $51.9 billion (281%) from the same quarter a year ago, driven by a $73 billion (117.3%) decline in provision expense. Two-thirds of all banks (66.4 %) reported year-over-year improvement in quarterly net income. The share of profitable institutions increased slightly, up 1.4% year over year to 95.8%. However, net income declined $6.4 billion (8.3%) from first quarter 2021, driven by an increase in provision expense from first quarter 2021 (up $3.7 billion to negative $10.8 billion). The aggregate return on average assets ratio of 1.24% rose 89 basis points from a year ago but fell 14 basis points from first quarter 2021.

Net Interest Margin Contracted Further to a New Record Low

The average net interest margin contracted 31 basis points from a year ago to 2.50%—the lowest level on record. The contraction is due to the year-over-year reduction in earning asset yields (down 53 basis points to 2.68%) outpacing the decline in average funding costs (down 22 basis points to 0.18%). Both ratios declined from first quarter 2021 to record lows. Aggregate net interest income declined $2.2 billion (1.7%) from second quarter 2020. Reductions in net interest income at the largest institutions drove the aggregate decline in net interest income, as more than three-fifths of all banks (64.1%) reported higher net interest income compared with a year ago.

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Noninterest Income Continued to Increase Despite Lower Trading Revenue

Noninterest income increased (up $5 billion, or 7.1%) from second quarter 2020 due to improvement in several categories. During the year ending second quarter 2021, “all other noninterest income” rose $7.9 billion (27.5%), offsetting both a $5.9 billion (42.1%) decline in trading revenue and a reduction in net gains on loan sales of $1.5 billion (19.7 %). Increased income from service charges on deposit accounts (up $1.5 billion, or 21.5%) and fiduciary activities (up $1.2 billion, or 13.1%) from second quarter 2020 also supported the year-over-year improvement in noninterest income. More than two-thirds of all institutions (69.6%) reported higher noninterest income compared with the year-ago quarter.

Noninterest Expense Relative to Average Assets Declined to a Record Low

Noninterest expense rose $3.7 billion (3%) year over year, led by an increase in salary and benefit expense and “all other noninterest expense.” Nearly three-fourths of all banks (74.5%) reported higher noninterest expense year over year. Higher average assets per employee (up $0.9 million) also increased from a year ago to $11.1 million. However, noninterest expense as a percentage of average assets continued to decline, reaching a record low of 2.23%, down 14 basis points from the year-ago quarter.

Net Operating Revenue to Average Assets Continued to Decline

Net operating revenue (net interest income plus noninterest income) increased $2.8 billion (1.4%) from the year-ago quarter as improvement in noninterest income offset the decline in net interest income. However, growth in average assets and declining net interest income contributed to a 29 basis point decline in the ratio of quarterly net operating revenue to average assets. The ratio stood at 3.62% for the quarter—the lowest level since third quarter 1984.

Provision Expense Was Negative for the Second Consecutive Quarter

Provisions for credit losses (provisions) increased $3.7 billion from first quarter 2021 but declined $73 billion (117.3%) from the year-ago quarter to negative $10.8 billion. More than three-fifths of all institutions (63.3%) reported lower provisions compared with the year-ago quarter. Nearly 14% of institutions reported an increase in provisions during the same period, while the remaining institutions reported no material change.

The net number of banks that have adopted current expected credit loss (CECL) accounting fell by 1 to 319 from first quarter 2021. CECL adopters reported aggregate negative provisions of $10.7 billion in second quarter, an increase of $4.3 billion from the previous quarter and a reduction of $67.6 billion from one year ago. Provisions for banks that have not adopted CECL accounting totaled negative $128.1 million (a reduction of $530.6 million from a quarter ago and $5.2 billion from one year ago).

Allowance for Loan and Lease Losses to Total Loans Remained Higher Than Pre-Pandemic Level

The allowance for loan and lease losses (ALLL) as a percentage of total loans and leases declined 41 basis points to 1.80% from the year-ago quarter due to negative provisions, but ALLL remains higher than the level of 1.18% reported in fourth quarter 2019. Similarly, the ALLL as a percentage of loans that are 90 days or more past due or in nonaccrual status (coverage ratio) declined 27 percentage points from the year-ago quarter to 178% but continued to exceed the financial crisis average of 79.1%. All insured institutions except the largest Quarterly Banking Profile asset size group (greater than $250 billion) reported higher aggregate coverage ratios compared with first quarter 2021.

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Noncurrent Loans Continued to Decline Quarter Over Quarter

Loans that were 90 days or more past due or in nonaccrual status (noncurrent loans) continued to decline (down $13.2 billion, or 10.8%) from first quarter 2021, supporting a 12 basis point reduction in the noncurrent rate to 1.01%. Noncurrent 1–4 family residential loans declined most among loan categories from the previous quarter (down $5.9 billion, or 10.9%), followed by noncurrent commercial and industrial (C&I) loans (down $3.1 billion, or 13.9%). Three-fifths of all banks reported a reduction in noncurrent loans compared with first quarter 2021.

The Net Charge-Off Rate Declined Further to a Record Low

Net charge-offs continued to decline for the fourth consecutive quarter (down $8.3 billion, or 53.2%). In second quarter, the net charge-off rate fell 30 basis points to 0.27%, a record low. A decline in net charge-offs of credit card loans (down $3.3 billion, or 39.8 %) and C&I loans (down $2.9 billion, or 69.7%) drove three-fourths (75.5%) of the reduction in net charge-offs from the year-ago quarter. More than half of all banks (51.6%) reported a decline in net charge-offs from a year ago.

Total Assets Increased, Especially Those With Maturities of More Than Five Years

Total assets increased $224.8 billion (1%) from first quarter 2021 to $22.8 trillion. More than four-fifths (86.1%) of all banks reported an increase in assets with contractual maturities greater than five years compared with a quarter ago. Cash and balances due from depository institutions declined $108 billion (3%), while securities rose $248.9 billion (4.5%). Growth in mortgage-backed securities (up $122.7 billion, or 3.8%) and U.S. Treasury securities (up $91.2 billion, or 8.5%) continued to spur quarterly increases in total securities. Growth in held-to-maturity securities from first quarter 2021 (up $273.6 billion, or 16.8%) outpaced that of available-for-sale (AFS) securities (down $27.3 billion, or 0.7%).

Quarterly Loan Balances Grew for the First Time Since Second Quarter 2020

Loan and lease balances increased $33.2 billion (0.3%) from the previous quarter, the first quarterly increase in loan balances since second quarter 2020. An increase in credit card loan balances (up $30.9 billion, or 4.1%) and an increase in auto loan balances (up $18.9 billion, or 3.8%) drove this growth. Half (50.3%) of all institutions reported a quarterly increase in total loans.

Compared with second quarter 2020, loan and lease balances contracted slightly (down $133.9 billion, or 1.2%), driven by a reduction in C&I loans (down $360.4 billion, or 13.4%). An increase in “all other loans” (up $182.8 billion, or 18.2%) mitigated the annual contraction in total loan balances. Compared with the year-ago quarter, more than half (52.8%) of all institutions reported a decline in total loans, but more than three-quarters (76.4%) of all institutions reported an increase in unused commitments to lend.

Deposits Continued to Grow but at a Moderated Pace in Second Quarter 2021

Deposits grew $271.9 billion (1.5%) in second quarter, down from the growth rate of 3.6% reported in first quarter 2021. The deposit growth rate in second quarter is near the long-run average growth rate of 1.2%. Deposits above $250,000 continued to drive the quarterly increase (up $297.8 billion, or 3.1%) and offset a decline in deposits below $250,000 (down $53.6 billion, or 0.7%). Noninterest-bearing deposit growth (up $175 billion, or 3.5%) continued to outpace that of interest-bearing deposits (up $53.3 billion, or 0.4 %), with more than half of banks (57.3%) reporting higher noninterest-bearing deposit balances compared with the previous quarter.

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Equity Capital Growth Remained Strong

Equity capital rose $55.3 billion (2.5%) from first quarter 2021. Retained earnings contributed $33.9 billion to equity formation despite a decline in retained earnings from first quarter (down $19.1 billion, or 36%). Banks distributed 51.9% of second quarter earnings as dividends, which were up $12.7 billion (53%) from a quarter ago. Nearly one-third (32%) of banks reported higher dividends compared with the year-ago quarter. The number of institutions with capital ratios that did not meet Prompt Corrective Action requirements for the well-capitalized category increased by three to nine from first quarter 2021.

Three New Banks Opened in Second Quarter 2021

The number of FDIC-insured institutions declined from 4,978 in first quarter 2021 to 4,951. During second quarter 2021, three new banks opened, 28 institutions merged with other FDIC-insured institutions, two banks ceased operations, and no banks failed. The number of banks on the FDIC’s “Problem Bank List” declined by four from first quarter to 51. Total assets of problem banks declined $8.4 billion (15.4%) from first quarter to $45.8 billion.

Critical Accounting Policies

The discussion contained in this Item 2 and other disclosures included within this report are based, in part, on the Company’s audited December 31, 2020 consolidated financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The financial information contained in these statements is, for the most part, based on the financial effects of transactions and events that have already occurred. However, the preparation of these statements requires management to make certain estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.

The Company’s significant accounting policies are described in the “Notes to Consolidated Financial Statements” accompanying the Company’s audited financial statements. Based on its consideration of accounting policies that involve the most complex and subjective estimates and judgments, management has identified the allowance for loan losses, the assessment of other-than-temporary impairment for investment securities and the assessment of goodwill impairment to be the Company’s most critical accounting policies.

Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan losses that is treated as an expense and charged against earnings. Loans are charged against the allowance for loan losses when management believes that collectability of the principal is unlikely. The Company has policies and procedures for evaluating the overall credit quality of its loan portfolio, including timely identification of potential problem loans. On a quarterly basis, management reviews the appropriate level for the allowance for loan losses, incorporating a variety of risk considerations, both quantitative and qualitative. Quantitative factors include the Company’s historical loss experience, delinquency and charge-off trends, collateral values, known information about individual loans and other factors. Qualitative factors include various considerations regarding the general economic environment in the Company’s market area. To the extent actual results differ from forecasts and management’s judgment, the allowance for loan losses may be greater or lesser than future charge-offs. Due to potential changes in conditions, including the economic disruption and uncertainties resulting from the COVID-19 pandemic, it is at least reasonably possible that changes in estimates will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

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For further discussion concerning the allowance for loan losses and the process of establishing specific reserves, see the section of the Annual Report on Form 10-K entitled “Asset Quality Review and Credit Risk Management” and “Analysis of the Allowance for Loan Losses”.

Fair Value and Other-Than-Temporary Impairment of Investment Securities

The Company’s securities available-for-sale portfolio is carried at fair value with “fair value” being defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.

Declines in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the intent to sell the investment securities and the more likely than not requirement that the Company will be required to sell the investment securities prior to recovery (2) the length of time and the extent to which the fair value has been less than cost and (3) the financial condition and near-term prospects of the issuer. Due to potential changes in conditions, including the economic disruption and uncertainties resulting from the COVID-19 pandemic, it is at least reasonably possible that changes in management’s assessment of other-than-temporary impairment will occur in the near term and that such changes could be material to the amounts reported in the Company’s financial statements.

Goodwill

Goodwill arose in connection with four acquisitions consummated in previous periods. Goodwill is tested annually for impairment or more often if conditions indicate a possible impairment. For the purposes of goodwill impairment testing, determination of the fair value of a reporting unit involves the use of significant estimates and assumptions. Impairment would arise if the fair value of a reporting unit is less than its carrying value. At September 30, 2021, Company’s management has completed the goodwill impairment assessment and determined goodwill was not impaired. Actual future test results may differ from the present evaluation of impairment due to changes in the conditions used in the current evaluation. Goodwill may be impaired in the future if the effects of the COVID-19 pandemic negatively impacts our net income and fair value. An impairment of goodwill would decrease the Company’s earnings during the period in which the impairment is recorded.

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Non-GAAP Financial Measures

This report contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include the Company’s presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis. Management believes these non-GAAP financial measures are widely used in the financial institutions industry and provide useful information to both management and investors to analyze and evaluate the Company’s financial performance. Limitations associated with non-GAAP financial measures include the risks that persons might disagree as to the appropriateness of items included in these measures and that different companies might calculate these measures differently. These non-GAAP disclosures should not be considered an alternative to the Company’s GAAP results. The following table reconciles the non-GAAP financial measures of net interest income and net interest margin on an FTE basis to GAAP (dollars in thousands).

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Reconciliation of net interest income and annualized net interest margin on an FTE basis to GAAP:
Net interest income (GAAP)	$	14,652		$	14,160		$	42,488		$	40,886
Tax-equivalent adjustment ⁽¹⁾		193			237			636			732
Net interest income on an FTE basis (non-GAAP)		14,845			14,397			43,124			41,618
Average interest-earning assets	$	1,999,147		$	1,796,452		$	1,989,226		$	1,754,518
Net interest margin on an FTE basis (non-GAAP)		2.97	%		3.21	%		2.89	%		3.16	%

(1) Computed on a tax-equivalent basis using an incremental federal income tax rate of 21 percent, adjusted to reflect the effect of the tax-exempt interest income associated with owning tax-exempt securities and loans.

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Income Statement Review for the Three Months ended September 30, 2021 and 2020

The following highlights a comparative discussion of the major components of net income and their impact for the three months ended September 30, 2021 and 2020:

AVERAGE BALANCES AND INTEREST RATES

The following two tables are used to calculate the Company’s non-GAAP net interest margin on an FTE basis. The first table includes the Company’s average assets and the related income to determine the average yield on earning assets. The second table includes the average liabilities and related expense to determine the average rate paid on interest-bearing liabilities. The net interest margin is equal to interest income less interest expense divided by average earning assets. Refer to the net interest income discussion following the tables for additional detail.

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended September 30,

	2021							2020

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	96,436	$	2,411		10.00	%	$	154,887	$	1,732		4.47	%
Agricultural		98,942		1,014		4.10	%		105,568		1,580		5.99	%
Real estate		934,427		8,936		3.83	%		890,097		9,324		4.19	%
Consumer and other		15,167		169		4.46	%		17,667		229		5.18	%

Total loans (including fees)		1,144,972		12,530		4.38	%		1,168,219		12,865		4.41	%

Investment securities
Taxable		598,634		2,256		1.51	%		362,553		1,987		2.19	%
Tax-exempt ⁽²⁾		146,805		918		2.50	%		164,010		1,128		2.75	%
Total investment securities		745,439		3,174		1.70	%		526,563		3,115		2.37	%

Interest-bearing deposits with banks and federal funds sold		108,736		168		0.62	%		101,670		176		0.69	%

Total interest-earning assets		1,999,147	$	15,872		3.18	%		1,796,452	$	16,156		3.60	%

Noninterest-earning assets		76,490							81,654

TOTAL ASSETS	$	2,075,637						$	1,878,106

(1) Average loan balances include nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

(2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Three Months Ended September 30,

	2021								2020

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,212,084	$	467			0.15	%	$	1,027,277	$	586			0.23	%
Time deposits		227,760		526			0.92	%		272,361		1,133			1.66	%
Total deposits		1,439,844		993			0.28	%		1,299,638		1,719			0.53	%
Other borrowed funds		38,863		34			0.35	%		37,597		40			0.42	%

Total interest-bearing liabilities		1,478,707		1,027			0.28	%		1,337,235		1,759			0.53	%

Noninterest-bearing liabilities
Noninterest-bearing checking		373,973								325,339
Other liabilities		9,786								12,689

Stockholders' equity		213,171								202,843

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,075,637							$	1,878,106


Net interest income (FTE) ⁽³⁾			$	14,845			2.97	%			$	14,397			3.21	%

Spread Analysis (FTE)
Interest income/average assets	$	15,872		3.06	%				$	16,156		3.44	%
Interest expense/average assets	$	1,027		0.20	%				$	1,759		0.37	%
Net interest income/average assets	$	14,845		2.86	%				$	14,397		3.07	%

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Net Interest Income

For the three months ended September 30, 2021 and 2020, the Company's net interest margin adjusted for tax exempt income was 2.97% and 3.21%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the three months ended September 30, 2021 totaled $14.7 million compared to $14.2 million for the three months ended September 30, 2020.

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For the three months ended September 30, 2021, interest income declined $239 thousand, or 2%, when compared to the same period in 2020. The reduction is primarily due to lower market interest rates, offset in part by an increase in the average balance of interest-earning assets and $1.7 million of fees recognized in commercial loan interest income from Paycheck Protection Program (PPP) loans as compared to $615 thousand of fees during the same period of 2020. The increase in average balances of interest-earning assets was primarily driven by the deployment of increased deposits.

Interest expense declined $731 thousand, or 42%, for the three months ended September 30, 2021 when compared to the same period in 2020. The lower interest expense for the period is primarily attributable to a decline in market interest rates and was offset in part by increases in average deposit balances. The increase in deposit balances was due primarily to government stimulus programs.

Provision (Credit) for Loan Losses

A (credit) for loan losses of ($94) thousand was recognized for the three months ended September 30, 2021 as compared to a provision for loan losses of $541 thousand for the three months ended September 30, 2020. Net loan recoveries totaled $31 thousand for the three months ended September 30, 2021 compared to net loan charge offs of $614 thousand for the three months ended September 30, 2020. The (credit) for loan losses was primarily due to improving economic conditions. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

Noninterest Income and Expense

Noninterest income for the three months ended September 30, 2021 totaled $2.7 million as compared to $2.8 million for the three months ended September 30, 2020, a decrease of 4%. The decrease in noninterest income was primarily due to a decrease in gains on sale of residential loans held for sale as refinancing has slowed.

Noninterest expense for the three months ended September 30, 2021 totaled $8.9 million compared to $9.3 million recorded for the three months ended September 30, 2020, a decrease of 4%. The decrease is primarily due to a reduction in salaries and benefits primarily due to a decline in the number of employees, offset in part by normal increases in salaries and other benefits, including health insurance. The efficiency ratio was 51.4% for the third quarter of 2021 as compared to 54.8% in the third quarter of 2020.

Income Taxes

Income tax expense for the three months ended September 30, 2021 totaled $1.8 million compared to $1.5 million recorded for the three months ended September 30, 2020. The effective tax rate was 21% and 20% for the three months ended September 30, 2021 and 2020, respectively. The lower than expected tax rate in 2021 and 2020 was due primarily to tax-exempt interest income and New Markets Tax Credits.

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Income Statement Review for the Nine Months ended September 30, 2021 and 2020

The following highlights a comparative discussion of the major components of net income and their impact for the nine months ended September 30, 2021 and 2020:

AVERAGE BALANCES AND INTEREST RATES

AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2021							2020

	Average		Revenue/		Yield/			Average		Revenue/		Yield/
	balance		expense		rate			balance		expense		rate
ASSETS
(dollars in thousands)
Interest-earning assets
Loans ⁽¹⁾
Commercial	$	113,448	$	6,281		7.38	%	$	128,638	$	4,455		4.62	%
Agricultural		96,173		2,999		4.16	%		109,038		4,601		5.63	%
Real estate		918,384		26,845		3.90	%		878,105		28,252		4.29	%
Consumer and other		14,768		516		4.66	%		18,113		713		5.25	%

Total loans (including fees)		1,142,773		36,641		4.28	%		1,133,894		38,021		4.47	%

Investment securities
Taxable		533,161		6,457		1.61	%		328,081		5,725		2.33	%
Tax-exempt ⁽²⁾		156,969		3,028		2.57	%		170,413		3,488		2.73	%
Total investment securities		690,130		9,485		1.83	%		498,494		9,213		2.46	%

Interest-bearing deposits with banks and federal funds sold		156,323		515		0.44	%		122,131		889		0.97	%

Total interest-earning assets		1,989,226	$	46,641		3.13	%		1,754,519	$	48,123		3.66	%

Noninterest-earning assets		76,434							82,377

TOTAL ASSETS	$	2,065,660						$	1,836,896

(1) Average loan balances include nonaccrual loans, if any. Interest income collected on nonaccrual loans has been included.

(2) Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental tax rate of 21%.

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AVERAGE BALANCE SHEETS AND INTEREST RATES

	Nine Months Ended September 30,

	2021								2020

	Average		Revenue/			Yield/			Average		Revenue/			Yield/
	balance		expense			rate			balance		expense			rate
LIABILITIES AND STOCKHOLDERS' EQUITY
(dollars in thousands)
Interest-bearing liabilities
Deposits
Interest-bearing checking, savings accounts and money markets	$	1,198,914	$	1,435			0.16	%	$	1,003,378	$	2,668			0.35	%
Time deposits		239,691		1,976			1.10	%		277,691		3,599			1.73	%
Total deposits		1,438,605		3,411			0.32	%		1,281,069		6,267			0.65	%
Other borrowed funds		39,927		106			0.35	%		46,164		238			0.69	%

Total interest-bearing liabilities		1,478,532		3,517			0.32	%		1,327,233		6,505			0.65	%

Noninterest-bearing liabilities
Noninterest-bearing checking		367,698								301,434
Other liabilities		9,880								11,941

Stockholders' equity		209,550								196,288

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,065,660							$	1,836,896


Net interest income (FTE) ⁽³⁾			$	43,124			2.89	%			$	41,618			3.16	%

Spread Analysis (FTE)
Interest income/average assets	$	46,641		3.01	%				$	48,123		3.49	%
Interest expense/average assets	$	3,517		0.23	%				$	6,505		0.47	%
Net interest income/average assets	$	43,124		2.78	%				$	41,618		3.02	%

(3) Net interest income (FTE) is a non-GAAP financial measure. For further information, refer to the Non-GAAP Financial Measures section of this report.

Net Interest Income

For the nine months ended September 30, 2021 and 2020, the Company's net interest margin adjusted for tax exempt income was 2.89% and 3.16%, respectively. Net interest income, prior to the adjustment for tax-exempt income, for the nine months ended September 30, 2021 totaled $42.5 million compared to $40.9 million for the nine months ended September 30, 2020.

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For the nine months ended September 30, 2021, interest income declined $1.4 million, or 3%, when compared to the same period in 2020. The decrease is primarily due to a reduction in interest rates, offset in part by $3.9 million of fees recognized in commercial loan interest income from PPP loans during the nine months ended September 30, 2021 as compared to $1.2 million of fees recognized during the same period of 2020.

Interest expense declined $3.0 million, or 46%, for the nine months ended September 30, 2021 when compared to the same period in 2020. The lower interest expense for the period is primarily attributable to a decline in market interest rates and offset in part by increases in average deposit balances.

Provision (credit) for Loan Losses

A (credit) for loan losses of ($540) thousand was recognized for the nine months ended September 30, 2021 as compared to a provision for loan losses of $4.4 million for the nine months ended September 30, 2020. Net loan recoveries totaled $155 thousand for the nine months ended September 30, 2021 compared to net loan charge offs of $1.1 million for the nine months ended September 30, 2020. The (credit) for loan losses in 2021 was primarily due to loan recoveries and a reduction in a specific reserve. The provision for loan losses in 2020 was primarily due to uncertainties associated with the economic slow-down created by the COVID-19 pandemic.

Noninterest Income and Expense

Noninterest income for the nine months ended September 30, 2021 totaled $7.8 million as compared to $7.9 million for the nine months ended September 30, 2020, a decrease of 1%. Wealth management income increased, but was offset by a decrease in securities gains when comparing periods. The increase in wealth management income was primarily related to growth in the assets under management, fueled by a favorable equity market and new account relationships.

Noninterest expense for the nine months ended September 30, 2021 totaled $27.3 million compared to $27.4 million recorded for the nine months ended September 30, 2020. Most of the decrease was related to salaries and employee benefits primarily due to a reduction in the number of employees and increased deferred loan costs associated with PPP loan volume, offset in part by normal increases in salaries and other benefits, including health insurance. This decrease was offset by an increase in FDIC insurance assessments and data processing costs. The efficiency ratio was 54.3% and 56.3% for the nine months ended September 30, 2021 and 2020, respectively.

Income Taxes

Income tax expense for the nine months ended September 30, 2021 totaled $4.9 million compared to $3.2 million recorded for the nine months ended September 30, 2020. The effective tax rate was 21% and 19% for the nine months ended September 30, 2021 and 2020, respectively. The lower than expected tax rate in 2021 and 2020 was due primarily to tax-exempt interest income and New Markets Tax Credits.

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Balance Sheet Review

As of September 30, 2021, total assets were $2.1 billion, a $120.7 million increase compared to December 31, 2020. This increase in assets is primarily due to investment securities and was funded by growth in our deposits due in part to federal government stimulus programs and a lack of other desirable fixed income alternatives for our customers.

Investment Portfolio

The investment portfolio totaled $765.4 million as of September 30, 2021, an increase of $168.4 million from the December 31, 2020 balance of $597.0 million. The increase in securities available-for-sale is primarily due to purchases of treasuries and municipals as deposit growth exceeded loan growth.

On a quarterly basis, the investment portfolio is reviewed for other-than-temporary impairment. As of September 30, 2021, gross unrealized losses of $3.1 million, are considered to be temporary in nature due to the interest rate environment and other general economic factors. As a result of the economic slowdown resulting from the COVID-19 pandemic, certain bonds in the investment portfolio may become other-than-temporarily impaired and could negatively affect the Company’s net income. As a result of the Company’s favorable liquidity position, the Company does not have the intent to sell securities with an unrealized loss at the present time. In addition, management believes it is more likely than not that the Company will hold these securities until recovery of their fair value to cost basis and expects full principal and interest to be collected. Therefore, the Company does not consider these investments to have other-than-temporary impairment as of September 30, 2021.

At September 30, 2021, the Company’s investment securities portfolio included securities issued by 287 government municipalities and agencies located within 27 states with a fair value of $276.7 million. At December 31, 2020, the Company’s investment securities portfolio included securities issued by 279 government municipalities and agencies located within 24 states with a fair value of $251.6 million. No one municipality or agency represents a concentration within this segment of the investment portfolio. Storm Lake, Iowa, general obligation bonds with a fair value of $7.8 million (approximately 2.8% of the fair value of the government municipalities and agencies) represent the largest exposure to any one municipality or agency for the Company as of September 30, 2021; the bonds are repayable from the levy of continuing annual tax on all the taxable property within the territory of the city of Storm Lake.

The Company’s procedures for evaluating investments in states, municipalities and political subdivisions include but are not limited to reviewing the offering statement and the most current available financial information, comparing yields to yields of bonds of similar credit quality, confirming capacity to repay, assessing operating and financial performance, evaluating the stability of tax revenues, considering debt profiles and local demographics, and for revenue bonds, assessing the source and strength of revenue structures for municipal authorities. These procedures, as applicable, are utilized for all municipal purchases and are utilized in whole or in part for monitoring the portfolio of municipal holdings. The Company does not utilize third party credit rating agencies as a primary component of determining if the municipal issuer has an adequate capacity to meet the financial commitments under the security for the projected life of the investment, and, therefore, does not compare internal assessments to those of the credit rating agencies. Credit rating downgrades are utilized as an additional indicator of credit weakness and as a reference point for historical default rates.

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The following table summarizes the total general obligation and revenue bonds in the Company’s investment securities portfolios as of September 30, 2021 and December 31, 2020 identifying the state in which the issuing government municipality or agency operates (in thousands) :

	2021				2020
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Obligations of states and political subdivisions:
General Obligation bonds:
Iowa	$	71,457	$	73,002	$	69,943	$	72,442
Nebraska		19,635		19,671		15,019		15,446
Texas		14,810		15,196		11,253		11,927
Washington		11,038		11,293		7,329		7,702
Other (2021: 16 states; 2020: 14 states)		41,670		42,217		32,014		32,989

Total general obligation bonds	$	158,610	$	161,379	$	135,558	$	140,506

Revenue bonds:
Iowa	$	63,282	$	64,240	$	65,461	$	67,048
Texas		11,910		12,260		8,625		9,189
Nebraska		8,537		8,507		6,588		6,753
Other (2021: 19 states; 2020: 17 states)		29,580		30,266		27,206		28,088

Total revenue bonds	$	113,309	$	115,273	$	107,880	$	111,078

Total obligations of states and political subdivisions	$	271,919	$	276,652	$	243,438	$	251,584

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As of September 30, 2021 and December 31, 2020, the revenue bonds in the Company’s investment securities portfolios were issued by government municipalities and agencies to fund public services such as community school facilities, college and university dormitory facilities, water utilities and electrical utilities. The revenue bonds are to be paid from 6 primary revenue sources. The revenue sources that represent 5% or more, individually, as a percent of the total revenue bonds are summarized in the following table (in thousands) :

	2021				2020
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value

Revenue bonds by revenue source
Sales tax	$	31,282	$	31,826	$	32,654	$	33,380
Water		20,677		21,143		21,934		22,660
College and universities, primarily dormitory revenues		15,013		15,347		11,332		11,810
Sewer		14,258		14,435		11,302		11,724
Leases		7,788		7,944		7,050		7,253
Electric power & light revenues		6,134		6,305		7,075		7,279
Other		18,157		18,273		16,533		16,972

Total revenue bonds by revenue source	$	113,309	$	115,273	$	107,880	$	111,078

Loan Portfolio

The loan portfolio, net of the allowance for loan losses, totaled $1.126 billion and $1.130 billion as of September 30, 2021 and December 31, 2020, respectively. The decrease was primarily due to a reduction in PPP and construction loans, offset in part by an increase in the commercial real estate and 1-4 family residential loan portfolio. The PPP loans totaled $14.8 million and $50.9 million as of September 30, 2021 and December 31, 2020, respectively. The PPP loans bear an interest rate of 1.0% and generally have a two to five year maturity. The Small Business Administration has provided fees to financial institutions to originate the PPP loans with recognition of the fees over the life of the loans. The Company has $652 thousand of unrecognized net PPP loan fees as of September 30, 2021. Management expects these loans to be forgiven and the net fees associated with these loans will be accelerated into interest income.

Deposits

Deposits totaled $1.84 billion and $1.72 billion as of September 30, 2021 and December 31, 2020, respectively. The change in deposits since December 31, 2020 was due to increases across all types except certificates of deposits which continue to decline due to the current rate environment. Balance fluctuations were primarily due to government stimulus programs and normal customer activity, as customers’ liquidity needs vary at any given time. Funds disbursed under the PPP program were deposited into customer accounts and may impact overall deposit fluctuations as customers spend those funds according to the PPP guidelines. Deposit levels may be impacted in future periods by additional government stimulus or distressed economic conditions.

Dividends Payable

There was $2.4 million of dividends payable as of September 30, 2021 as compared to no dividends payable as of September 30, 2020. For the quarter ended September 30, 2021 the dividend was declared on August 17, 2021 and will be paid in the fourth quarter of 2021. For the quarter ended September 30, 2020 the dividend was not declared until October 14, 2020 and was paid in the fourth quarter of 2020. In the past, dividends were declared in one quarter and then paid in the subsequent quarter, we returned to this practice in the third quarter of 2021.

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Off-Balance Sheet Arrangements

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. No material changes in the Company’s off-balance sheet arrangements have occurred since December 31, 2020.

Asset Quality Review and Credit Risk Management

The Company’s credit risk is historically centered in the loan portfolio, which on September 30, 2021 totaled $1.126 billion compared to $1.130 billion as of December 31, 2020. Net loans comprise 54% of total assets as of September 30, 2021. The objective in managing loan portfolio risk is to reduce the risk of loss resulting from a customer’s failure to perform according to the terms of an agreement and to quantify and manage credit risk on a portfolio basis. The Company’s level of problem loans (consisting of nonaccrual loans and loans past due 90 days or more) as a percentage of total loans was 1.11% at September 30, 2021, as compared to 1.33% at December 31, 2020. The decrease in the level of problem loans is due primarily to payoffs of nonaccrual loans. The Company’s level of problem loans as a percentage of total loans at September 30, 2021 of 1.11% is higher as compared to the Iowa State Average peer group of FDIC insured institutions as of June 30, 2021, of 0.60%, most recent available.

Impaired loans totaled $12.5 million as of September 30, 2021 and have decreased $2.8 million as compared to the impaired loans of $15.3 million as of December 31, 2020. The decrease is primarily due to payoffs of nonaccrual loans.

The Company had TDRs of $10.6 million as of September 30, 2021 and $11.3 million as of December 31, 2020, all of which were included in impaired and nonaccrual loans.

TDRs are monitored and reported on a quarterly basis. Certain TDRs are on nonaccrual status at the time of restructuring. These borrowings are typically returned to accrual status after the following: sustained repayment performance in accordance with the restructuring agreement for a reasonable period of at least nine months; and, management is reasonably assured of future performance. If the TDR meets these performance criteria and the interest rate granted at the modification is equal to or greater than the rate that the Company was willing to accept at the time of the restructuring for a new loan with comparable risk, then the loan will return to performing status.

Section 4013 of the CARES Act, “Temporary Relief From TDRs,” allows financial institutions the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time during the COVID-19 pandemic. This temporary suspension may only be applied to modifications of loans that were not more than 30 days past due as of December 31, 2019 and may not be applied to modifications that are not related to the COVID-19 pandemic. If elected, the temporary suspension may be applied to eligible modifications executed during the period beginning on March 1, 2020 and ending on the earlier of December 31, 2020, extended to January 1, 2022 under the Coronavirus Response and Relief Supplemental Appropriations Act, or 60 days after the termination of the COVID-19 national emergency. In March 2020, federal banking regulators in consultation with the FASB issued interagency statements that include similar guidance on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement provided that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

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For TDRs that were on nonaccrual status before the modification, a specific reserve may already be recorded. In periods subsequent to modification, the Company will continue to evaluate all TDRs for possible impairment and, as necessary, recognize impairment through the allowance. No additional specific reserve was provided for the three and nine months ended September 30, 2021 and 2020. The Company had no charge-offs and $262 thousand of recoveries for TDR’s for the three and nine months ended September 30, 2021, respectively. The Company had $15 thousand and $31 thousand of charge-offs for TDR’s for the three and nine months ended September 30, 2020, respectively. The Company does not have material commitments to lend additional funds to borrowers with loans whose terms have been modified in troubled debt restructurings or whose loans are on nonaccrual.

Loans past due 90 days or more that are still accruing interest are reviewed no less frequently than quarterly to determine if there continues to be a strong reason that the credit should not be placed on nonaccrual. As of September 30, 2021, nonaccrual loans totaled $12.5 million and there were $84 thousand of loans past due 90 days and still accruing. This compares to nonaccrual loans of $15.3 million and loans past due 90 days and still accruing totaled $39 thousand as of December 31, 2020. The decrease in nonaccrual loans is due primarily to payoffs of nonaccrual loans. Real estate owned totaled $768 thousand and $218 thousand as of September 30, 2021 and December 31, 2020, respectively.

The agricultural real estate and agricultural operating loan portfolio classifications remain elevated. The watch and special mention loans in these categories totaled $35.9 million as of September 30, 2021 as compared to $54.1 million as of December 31, 2020. This decrease is generally due to payments received from various agricultural customers. The substandard and impaired loans in these categories totaled $7.3 million and $9.5 million as of September 30, 2021 and December 31, 2020, respectively.

The watch and special mention loans classified as commercial real estate totaled $103.9 million as of September 30, 2021 as compared to $111.9 million as of December 31, 2020. The substandard and impaired commercial real estate loans totaled $34.2 million and $37.9 million as of September 30, 2021 and December 31, 2020, respectively.

The allowance for loan losses as a percentage of outstanding loans as of September 30, 2021 was 1.47%, as compared to 1.50% at December 31, 2020. The allowance for loan losses totaled $16.8 million and $17.2 million as of September 30, 2021 and December 31, 2020, respectively. PPP loans are government guaranteed and the impact on the allowance for loan loss was not significant.

The allowance for loan losses is management’s best estimate of probable losses inherent in the loan portfolio as of the balance sheet date. Factors considered in establishing an appropriate allowance include: an assessment of the financial condition of the borrower, a realistic determination of value and adequacy of underlying collateral, the condition of the local economy and the condition of the specific industry of the borrower, an analysis of the levels and trends of loan categories and a review of delinquent and classified loans. The decrease in the allowance for loan losses is mainly due to net loan recoveries and a reduction in a specific reserve, offset in part by higher loan balances from year-end excluding PPP loans. Additional increases in the allowance for loan losses are possible if the effects of the COVID-19 conditions negatively impacts our loan portfolio. These increases may be due to increased charge-offs or an increase in the qualitative factors. The qualitative factors are considered as a part of our allowance for loan loss calculation and may deteriorate if the economic effects of COVID-19 worsen in the State of Iowa and a resumption to typical social and economic activity is delayed.

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Liquidity and Capital Resources

Liquidity management is the process by which the Company, through its Banks’ Asset and Liability Committees (ALCO), ensures that adequate liquid funds are available to meet its financial commitments on a timely basis, at a reasonable cost and within acceptable risk tolerances. These commitments include funding credit obligations to borrowers, funding of mortgage originations pending delivery to the secondary market, withdrawals by depositors, maintaining adequate collateral for pledging for public funds, trust deposits and borrowings, paying dividends to shareholders, payment of operating expenses, funding capital expenditures and maintaining deposit reserve requirements.

Liquidity is derived primarily from core deposit growth and retention; principal and interest payments on loans; principal and interest payments, sale, maturity and prepayment of securities available-for-sale; net cash provided from operations; and access to other funding sources. Other funding sources include federal funds purchased lines, FHLB advances and other capital market sources.

As of September 30, 2021, the level of liquidity and capital resources of the Company remain at a satisfactory level. Management believes that the Company's liquidity sources will be sufficient to support its existing operations for the foreseeable future.

The liquidity and capital resources discussion will cover the following topics:

●	Review of the Company’s Current Liquidity Sources

●	Review of Statements of Cash Flows

●	Company Only Cash Flows

●	Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

●	Capital Resources

Review of the Company’s Current Liquidity Sources

Liquid assets of cash and due from banks and interest-bearing deposits in financial institutions and federal funds sold as of September 30, 2021 and December 31, 2020 totaled $148.4 million and $191.5 million, respectively, and management believes these sources provide an adequate level of liquidity given current economic conditions.

Other sources of liquidity available to the Banks as of September 30, 2021 include outstanding lines of credit with the FHLB of Des Moines, Iowa of $306.6 million, with $3.0 million of outstanding FHLB advances. The Company also has a $4 million line of credit with an unaffiliated bank, with no outstanding borrowings as of September 30, 2021. Federal funds borrowing capacity at correspondent banks was $107.9 million, with no outstanding federal fund purchase balances as of September 30, 2021. The Company had securities sold under agreements to repurchase totaling $36.3 million as of September 30, 2021.

Total investments as of September 30, 2021 were $765.4 million compared to $597.0 million as of December 31, 2020. These investments provide the Company with a significant amount of liquidity since all of the investments are classified as available-for-sale as of September 30, 2021.

The investment portfolio serves an important role in the overall context of balance sheet management in terms of balancing capital utilization and liquidity. The decision to purchase or sell securities is based upon the current assessment of economic and financial conditions, including the interest rate environment, liquidity and credit considerations. The portfolio’s scheduled maturities and payments represent a significant source of liquidity.

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Review of the Consolidated Statements of Cash Flows

Net cash provided by operating activities for the nine months ended September 30, 2021 totaled $23.7 million compared to $21.3 million for the nine months ended September 30, 2020. The increase of $2.4 million in cash provided by operating activities was primarily due to an increase in net income.

Net cash used in investing activities for the nine months ended September 30, 2021 was $134.7 million compared to $178.2 million for the nine months ended September 30, 2020. The decrease of $43.5 million in cash used in investing activities was primarily due to a decrease in interest-bearing deposits in financial institutions and loans, offset in part by an increase in purchases of investments.

Net cash provided by financing activities for the nine months ended September 30, 2021 totaled $111.7 million compared to $145.0 million for the nine months ended September 30, 2020. The decrease in cash provided by financing activities of $33.3 million was primarily due to a lower increase in deposits between periods. As of September 30, 2021, the Company did not have any external debt financing, off-balance sheet financing arrangements, or derivative instruments linked to its stock.

Review of Company Only Cash Flows

The Company’s liquidity on an unconsolidated basis is heavily dependent upon dividends paid to the Company by the Banks. The Banks provide adequate liquidity to pay the Company’s expenses and stockholder dividends. Dividends paid by the Banks to the Company amounted to $7.1 million and $7.2 million for the nine months ended September 30, 2021 and 2020, respectively. Various federal and state statutory provisions limit the amounts of dividends banking subsidiaries are permitted to pay to their holding companies without regulatory approval. Federal Reserve policy further limits the circumstances under which bank holding companies may declare dividends. For example, a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality and overall financial condition. In addition, the Federal Reserve and the FDIC have issued policy statements, which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Federal and state banking regulators may also restrict the payment of dividends by order.

The Company, on an unconsolidated basis, has interest-bearing deposits totaling $2.1 million as of September 30, 2021.

Review of Commitments for Capital Expenditures, Cash Flow Uncertainties and Known Trends in Liquidity and Cash Flows Needs

On April 16, 2021, the Company entered into a commitment with a contractor to build a new branch in West Des Moines, Iowa for $1.7 million. No other material capital expenditures or material changes in the capital resource mix are anticipated at this time. The primary cash flow uncertainty would be a sudden decline in deposits causing the Banks to liquidate securities. Historically, the Banks have maintained an adequate level of short-term marketable investments to fund the temporary declines in deposit balances. There are no known trends in liquidity and cash flow needs as of September 30, 2021 that are of concern to management.

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Capital Resources

The Company’s total stockholders’ equity as of September 30, 2021 totaled $210.4 million and was $893 thousand more than the $209.5 million recorded as of December 31, 2020. The increase in stockholders’ equity was primarily the result of the retention of net income in excess of dividends, offset in part by a reduction in accumulated other comprehensive income. The decrease in other comprehensive income is created by higher market interest rates compared to December 31, 2020, which resulted in lower fair values in the securities available-for-sale portfolio. At September 30, 2021 and December 31, 2020, stockholders’ equity as a percentage of total assets was 10.0% and 10.6%, respectively. The capital levels of the Company exceed applicable regulatory guidelines as of September 30, 2021.

Forward-Looking Statements and Business Risks

Th e Private Securities Litigation Reform Act of 1995 provides the Company with the opportunity to make cautionary statements regarding forward-looking statements contained in this Quarterly Report, including forward-looking statements concerning the Company’s future financial performance and asset quality. Any forward-looking statement contained in this Quarterly Report is based on management’s current beliefs, assumptions and expectations of the Company’s future performance, taking into account all information currently available to management. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to management. If a change occurs, the Company’s business, financial condition, liquidity, results of operations, asset quality, plans and objectives may vary materially from those expressed in the forward-looking statements. The risks and uncertainties that may affect the actual results of the Company include, but are not limited to, the following: the substantial negative impact of the COVID-19 pandemic on national, regional and local economies in general and on our customers in particular; competitive products and pricing available in the marketplace; changes in credit and other risks posed by the Company’s loan and investment portfolios, including declines in commercial or residential real estate values or changes in the allowance for loan losses resulting from the COVID-19 pandemic or as dictated by new market conditions or regulatory requirements; fiscal and monetary policies of the U.S. government; changes in governmental regulations affecting financial institutions (including regulatory fees and capital requirements); changes in prevailing interest rates; credit risk management and asset/liability management; the financial and securities markets; the availability of and cost associated with sources of liquidity; and other risks and uncertainties inherent in the Company’s business, including those discussed under the heading “Risk Factors” in the Company’s annual report on Form 10-K. Management intends to identify forward-looking statements when using words such as “believe”, “expect”, “intend”, “anticipate”, “estimate”, “should”, “forecasting” or similar expressions. Undue reliance should not be placed on these forward-looking statements. The Company undertakes no obligation to revise or update such forward-looking statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company's market risk is comprised primarily of interest rate risk arising from its core banking activities of lending and deposit taking. Interest rate risk results from the changes in market interest rates which may adversely affect the Company's net interest income. Management continually develops and applies strategies to mitigate this risk. Management does not believe that the Company's primary market risk exposure and how it has been managed year-to-date in 2021 changed significantly when compared to 2020. Uncertainty due to the federal governmental actions stemming from reactions to the COVID-19 pandemic, may cause market interest rates to deviate from historical norms.

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Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There was no change in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

	Not applicable

Item 1.A.	Risk Factors

	Management does not believe there have been any material changes in the risk factors that were disclosed in the Company's Form 10-K filed with the SEC on March 12, 2021.

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Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

	In April, 2021, the Company approved a Stock Repurchase Plan which provided for the repurchase of up to 100,000 shares of the Company’s common stock. As of September 30, 2021, there were 75,397 shares remaining to be purchased under the plan.

	The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchases” (as defined in rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the three months ended September 30, 2021.

Total

Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of

May Yet Be

Number

Average

Publicly

Purchased

of Shares

Price Paid

Announced

Under

Period

Purchased

Per Share

Plans

The Plan

July 1, 2021 to July 31, 2021

100,000

August 1, 2021 to August 31, 2021

100,000

September 1, 2021 to September 30, 2021

24,603

23.19

24,603

75,397

Total

24,603

Item 3.	Defaults Upon Senior Securities

	Not applicable

Item 4.	Mine Safety Disclosures

	Not applicable

Item 5.	Other information

	Not applicable

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Item 6.	Exhibits

31.1	Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

101.INS	Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (1)
101.SCH	Inline XBRL Taxonomy Extension Schema Document (1)
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document (1)
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document (1)
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document (1)
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document (1)

104	Cover page Interactive Data File (formatted as Inline XBRL and combined in Exhibit 101.1)

(1) These interactive date files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AMES NATIONAL CORPORATION

DATE: November 8, 2021	By: /s/ John P. Nelson

	John P. Nelson, Chief Executive Officer and President

	By: /s/ John L. Pierschbacher

	John L. Pierschbacher, Chief Financial Officer

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Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part Of

Exhibits

31.1 Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.

ATLO 10-Q Quarter ended Sept. 30, 2021

Exhibits